The current crisis rocking the markets and global economy could turn out to be the worst since World War II, former US Federal Reserve chairman Alan Greenspan said in remarks published on Monday.
"The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the Second World War," Greenspan said in a Financial Times commentary.
"It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities," he said, referring to the meltdown in the US subprime home loan market and subsequent massive losses for the banks holding the debt instruments.
"The crisis will leave many casualties," he said, his remarks coming after Bear Stearns, the fifth largest US investment house collapsed Friday and was taken over by JPMorgan Chase for a fraction of its value of only a week ago.
At the weekend, the Fed also announced a series of emergency measures intended to ease the credit crunch and calm nerves as investors fled to apparent safety in the euro and commodities such as oil and gold, which hit record highs again Monday as stockmarkets in Asia and Europe tumbled.
"Particularly hard hit will be much of today's financial risk-valuation system, significant parts of which failed under stress," said Greenspan, who some have criticised for contributing at least in part to the current crisis by being too lax on monetary policy whilst head of the Fed.
Greenspan recognised that changes would have to be made as a result of the crisis but he argued that they should not compromise the abiding principles of free competition.
"In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence," he said.
"Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulations not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition."
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